HSBC has revealed to its investors that the current coronavirus pandemic could cost the bank up to £9bn this year, following the announcement that it has seen a sharp fall in quarterly profits.
The bank saw earnings fall to £2.5bn for the January-March period – down 48% compared to the same quarter last year. The fall was largely down to a £1.9bn charge for ‘expected credit losses’ – known as ECLs – a provision for loans going bad.
Underlying net operating income fell 5.8% to £10.7bn in the first quarter, as market movements negatively affected the life insurance business and parts of the investment bank. Despite lower operating costs profits before tax fell 51.3% to £2.4bn.
Given the ongoing impact of coronavirus management now expect profitability in 2020 to be materially lower than in 2019. Having suspended dividend payments at the regulator’s request earlier this year, the bank confirmed that the dividend policy will be reviewed at or ahead of, full year results.
The shares fell 1.7% in early trading following the news.
Nicholas Hyett, Equity Analyst at Hargreaves Lansdown
The fact HSBC has put aside a sizeable lump for coronavirus related loan defaults isn’t exactly a surprise and we’re actually reasonably impressed at how performance has held up so far.
Loan growth has offset pressure from lower interest rates, while increased volatility in financial markets can actually be good news for the investment bank. Meanwhile the bank’s capital base has been able to absorb the impairment and an increase in the risk profile of the bank’s loans without deteriorating significantly – albeit with the help of the suspension of 2019’s final dividend.
That said there are difficult times ahead. The pain from lower interest rates will mount as fixed loans roll-off, and reduced economic activity is also likely to bite in the trade finance and commercial banking businesses. If conditions get worse from here provisions for bad loans will increase, and together with credit downgrades that will eat into capital reserves.
So far though HSBC’s diverse business seems to be serving it well.